Internal auditing vs. external auditing

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Auditing is an important function that contributes to a company’s financial well-being. Companies that stay up to date in their auditing practices can effectively adhere to compliance guidelines. Although internal and external auditing practices can positively impact a company’s bottom line, they don’t hire and contract auditors for the sole purpose of boosting revenue. Organizations are required to conduct regular audits to ensure they are meeting compliance standards.

Internal auditors completing assignment

While some professionals are specialized in one type of auditing—either internal or external—many are involved in both areas of this procedure. This is due to the fact that internal and external auditing, though separate functions, occur cohesively rather than in opposition to one another.

You might already know that you’d like to pursue a career as an auditor. What you may not know is what type of auditing you should do: internal or external. Even though both components of the auditing process are vital, each role has specific duties that differ from the other.

The difference between internal and external auditing

First, it’s essential to provide internal and external audit definitions, so you can decide which function you would rather pursue.

Internal auditing

During this procedure, the internal auditor will examine an organization’s arrangements regarding governance, internal control, and risk management. At the end of the auditing process, this professional will provide an internal opinion on the state of the company’s performance in each of these areas. Then they will create made-to-order reports, which they will send to the audit committee and the board. The public does not see the results of an organization’s internal audit. Because an internal auditor works with different teams of employees and covers a variety of corporate operations, these professionals’ skill sets are typically more interdisciplinary than focused on one specialization.

Generally, an internal audit has more to do with an organization’s operations than the business’ financial state. This transaction might even double as a consultation, in which the auditor provides the company with insights on how it can improve its controls. For that reason, an internal audit typically occurs as an ongoing process.

Internal auditors may be employees of the business that is undergoing the auditing process. In order to perform their duties effectively and without bias, internal auditors can only work alongside projects they have not directly contributed to. For this reason, internal employees typically report directly to the board rather than a manager at the firm. However, many organizations outsource their internal auditors from other accounting firms.

Internal auditors must be compliant with the Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing. This set of conduct standards helps companies eliminate ineffective or counterproductive practices, so they can run their businesses more smoothly. Here are some of the issues an internal auditor can detect:

  • Fraudulent activities
  • Risks in governance, risk management, and internal control
  • Wasteful spending
  • Compliance with industry- or location-specific regulations

External auditing

Unlike an internal auditor, whose goals are to improve the organization’s governance, an external auditor expresses an opinion regarding the company’s financial state. External auditors will report this condition to the public. The major parties that benefit from this external audit include investors, creditors, and lenders. Since external auditors are experts in reporting on business’ financial statements, they are generally specialized in the fields of accounting, tax, and finance.

An external auditor will report on the issuance of the following financial statements:

  • Balance sheet
  • Income statement
  • Cash flow statement
  • Statement of stockholders’ equity
  • Supplementary notes, which explains different financial actions and provides additional information on some accounts

Organizations bring in external auditors from contracted third-party firms, since they have no vested interest in the organization and can therefore provide an unbiased report. They must perform their duties in accordance with the International Auditing and Assurance Standards Board International Standards on Auditing.

Internal vs. external audit

Now that you’ve gained a broad understanding of these two fields of auditing, you might have an inclination toward one. However, if you still aren’t sure what direction you’d like to take with your career, you can relax. Many professionals do not decide to specialize in one component of auditing over the other until midway through their careers. Others make the decision during their graduate education after they’ve taken a specific course in auditing.

The decision of the type of auditing you should pursue depends on your preferred work environment. If you’d rather work directly with a company, serving as a consultant, you might prefer a career as an auditor. If you’d prefer to work on the reporting side of accounting rather than the consulting end, you might pursue the career of an external auditor instead.

Gain critical auditing insight with a master’s degree

Auditors, both internal and external, can gain vital experience and insight into the fields of accounting and auditing when they enroll in a master’s in accounting program. Pursuing a MAc at an accredited university, such as the University of Alabama at Birmingham’s Collat School of Business, provides students with the comprehensive knowledge they need to begin a career as an internal or external auditor. Graduate students who choose to study online can complete coursework on schedules that suit their busy lives. This is an ideal academic path for students who need to balance their studies with their professional responsibilities.

The master’s in accounting program at UAB is composed of a variety of cutting-edge accounting courses that represent the practice as it exists in today’s professional settings. Current and prospective auditors and accountants who are interested in advancing their careers or becoming a CPA can gain invaluable skills in UAB’s selection of online course requirements.

Recommended Reading:

Accountant vs. auditor: What career should you pursue?

What is cost allocation?


Online Master’s Degree in Accounting

The Clarified Standards by the International Federation of Accountants

Global Perspectives and Insights: Internal Audit and External Audit by the Institute of Internal Auditors

International Standards for the Professional Practice of Internal Auditing (Standards) by the IIA